House Rich, Cash Poor

It amazes me how many Americans are really house rich and cash poor.  If you do a measure of net worth (assets minus liabilities), I’m guessing that a good portion of Americans have a majority of their net worth as equity in their house.  This is even after the housing bust from the late 2000s.

Home ownership is obviously encouraged in the U.S.  Most middle class families will own, as opposed to renting.  Perhaps part of this is due to incentives by the government and Federal Reserve (artificially low interest rates and inflation).  But part of it may also be societal pressure.  Part of it is also just wanting to own something and make it your own.  This last piece is particularly true for women.  Women don’t want a house.  They want a home.

I see buying a house as something of a forced savings plan.  As long as you don’t continue to move or refinance or tap an equity line of credit, then you are going to slowly pay down the principal balance on your mortgage.  If someone stays in the same house for 30 years and doesn’t refinance for an extended term, then they will find themselves owning a house outright after 30 years.

Owning a house doesn’t always make sense.  There are many reasons to rent, especially for people with less money and people who want the flexibility to move quickly.  But since so many Americans lack the discipline to save, owning a house can be beneficial because it is like a forced savings plan.  That is why the majority of wealth for middle class Americans is in their house and 401k or other retirement plan.

Of course, it is best if you can be a disciplined saver and put money aside that isn’t just going to pay down your mortgage.  The decision to rent or own should be done on its own merits and not be decided just because you are a terrible saver.

I find this similar to a whole life insurance plan.  I generally recommend against whole life insurance.  I am definitely one who would say that you should buy term and invest the difference.  But whole life plans have probably benefitted a few people over the years because it has forced them to save money.  It may not have been the optimal way to save, but if they hadn’t bought the whole life insurance, they probably wouldn’t have saved at all.

One thing I find crazy is when I hear people who own expensive houses/ properties and yet have almost nothing in retirement or savings.  I have heard stories of people with million dollar houses in California, that are often paid off or closed to paid off, yet they don’t have any liquid savings.

If I were in this situation, I would sell the house and either rent or move.  If you have a high income, such as a successful Hollywood actor, then moving may not make sense.  In this case, you can rent.

It is crazier when I hear someone in California who makes $80,000 per year.  They could move to Texas or Florida (no state income taxes) and make $60,000 per year instead.  But the key is that they could buy a similar house for 20% of the cost of a house in some areas of California.

I understand that some people like the lifestyle or they have family ties in a particular area.  But some of these people are so house rich and cash poor that they could become instant millionaires just by moving.  They could practically retire or go down to part-time work just from the sale of their house.

Houses are things.  You need some form of shelter to live in, but there is a lot of flexibility as to where that is.  Money can buy you lifestyle.  It doesn’t do you much good to live by the beach in California if you have to work most of the time to pay for it.

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